When a company runs into financial difficulties, directors sometimes make decisions that later come under scrutiny. One of the most serious allegations you can face is fraudulent trading.
Fraudulent trading means carrying on business with the intent to defraud creditors or for any fraudulent purpose. It is not about poor judgement or bad luck; it’s about deliberate dishonesty. Because of that, it carries the harshest penalties available under UK insolvency law.
The difference between wrongful and fraudulent trading
Many directors confuse wrongful and fraudulent trading, but the distinction is critical:
Wrongful trading happens when directors continue trading while they knew (or ought to have known) the company had no reasonable prospect of avoiding insolvency. It doesn’t require dishonesty, just recklessness or negligence.
Fraudulent trading requires intent. It’s where a director knowingly carries on business to defraud creditors.
Put simply: wrongful trading is about poor decisions, while fraudulent trading is about dishonesty.
Examples of fraudulent trading
Fraudulent trading can take many forms. Some of the most common include:
- Taking customer deposits for goods or services with no intention of delivering them
- Taking out credit knowing there’s no ability (or plan) to repay
- Moving assets out of the business to put them beyond creditors’ reach
- Running “phoenix” schemes designed to dump debt and transfer value to a new company
- Concealing debts or falsifying records to mislead lenders, suppliers or HMRC
If a liquidator or the Insolvency Service believes these actions were deliberate, they can pursue a claim for fraudulent trading.
What does the law say?
Fraudulent trading is defined under Section 213 of the Insolvency Act 1986 (for companies in liquidation) and Section 993 of the Companies Act 2006 (a criminal offence). That means fraudulent trading can have both civil and criminal consequences:
Civil liability: Directors can be ordered to personally contribute to company debts.
Criminal liability: Fraudulent trading is punishable by up to 10 years in prison, as well as fines and director disqualification.
How fraudulent trading is investigated
When a company goes into liquidation, the appointed liquidator has a duty to review the directors’ conduct. If they spot signs of dishonesty, they must report it to the Insolvency Service.
Investigations look at:
- Whether directors knew the company couldn’t meet its obligations
- What payments or contracts were entered into during that period
- Whether there was a pattern of concealment, misrepresentation or asset transfers
- The timing of decisions and who authorised them
If there’s evidence of fraudulent intent, the case can be referred for prosecution.
How to avoid allegations of fraudulent trading
For most directors, fraudulent trading isn’t a risk because they simply want to do the right thing but may have acted too late. Still, it’s vital to understand how to protect yourself:
Keep accurate records – Transparency is your best defence.
Don’t mislead creditors – Be honest about the company’s position, even if the news is bad.
Seek advice early – Once insolvency is likely, speak to a licensed insolvency practitioner before making major decisions.
Stop trading if there’s no prospect of recovery – Continuing to take money when you know you can’t deliver could be seen as fraud.
We can help you stay on the right side of the law
The safest course is to get advice before making payments or taking on new obligations. Our licensed insolvency practitioners will explain your director’s duties clearly, review your company’s financial position, and guide you on the right course of action. We can help you:
- Clarify whether your business still has a realistic future
- Take formal steps to restructure or close the company lawfully
- Avoid actions that could later be viewed as fraudulent
- Demonstrate that you acted responsibly and with creditors’ interests in mind
If your business is no longer viable, we’ll help you close it in a way that helps to protect you and ensures you’re compliant with the law. Contact us today for free, confidential advice.
